London, Tehran, a Gas Station Near You

November 30, 2011

A chain of events which began last week with tough new UK sanctions on Iran has now led to apparently orchestrated protestors swarming the British Embassy in Tehran and a UK decision to close the embassy and order Iranian diplomats in London to leave the country. As tensions rise and the Senate prepares to consider additional sanctions — this time against Iran’s Central Bank — the world oil market is bracing itself for the worst. When tensions with Iran peaked in 2007 and speculation of an attack grew, the cost of a barrel of oil jumped 36 percent. During a time of fragile economic recovery, such a spike would have a serious impact on the U.S. economy. And as additional pressure is applied, Iran continues to try and spin this to its advantage politically. Mark Fitzpatrick of the International Institute for Strategic Studies explains, “Threats of a military option or regime change only reinforce their determination to resist.”

British embassy closes as tensions with Iran rise. The New York Times reports, “Britain said on Wednesday that it had closed its embassy in Tehran, withdrawn all its diplomats and ordered Iran to do the same within 48 hours at its own diplomatic mission in London in the worst rupture of relations in decades. The measures were announced in Parliament by Foreign Secretary William Hague a day after Iranian protesters shouting ‘Death to England’ stormed the British Embassy compound and a diplomatic residence in Tehran, tearing down the British flag, smashing windows, defacing walls and briefly detaining six staff members in what appeared to be a state-sponsored protest against Britain’s tough new economic sanctions against Iran.” The Guardian explains, “Last week, the chancellor, George Osborne, announced fresh punitive measures targeting Iranian financial sectors, including the Central Bank of Iran (CBI), in the wake of a report by the International Atomic Energy Agency (IAEA), which said the Islamic regime had been engaged in nuclear activities with military applications. Iran denied the claims, saying the UN report had been fabricated. Iran’s oil industry relies heavily on the CBI for most of its banking transactions. Sanctioning the CBI would have drastic consequences for the country’s economy, but the largest buyers of Iran’s crude oil such as China, Japan and India are unlikely to follow Britain’s path.” [New York Times, 11/30/11. The Guardian, 11/27/11]

Pressure alone seen as unlikely to make progress. This ugly incident underscores the difficulty of dealing with Iran: “But the talks with the P5+1 should go ahead,” The Guardian writes. “The path on which Britain has strode with Iran’s nuclear programme – accelerated and tougher economic sanctions – will not work on a country with porous borders and China as a ready buyer of Iranian oil. Nor will it work in the absence of a positive incentive to talk. The report of the IAEA, despite the heavy pre-publication spin, did not essentially contradict the [National Intelligence Estimate] report in 2007, which said that Iran had halted its nuclear weapons programme in 2003. Instead the IAEA said that although there was evidence that some work had continued, it was not as strong as the evidence before the 2003 decision. While this ambiguity exists, a window for talks remains.” [The Guardian, 11/29/11]

The Senate, meanwhile, is preparing to sanction Iran’s Central Bank. Foreign Policy’s Josh Rogin reported yesterday, “Senate Democrats and Republicans have agreed on a way forward regarding new sanctions on the Central Bank of Iran (CBI) that would impose crippling sanctions on the Iranian economy, with an eye toward preventing a catastrophic consequence for the world oil markets. Last night, Sens. Mark Kirk (R-IL) and Robert Menendez (D-NJ) filed a new amendment to the defense policy bill that represents a compromise of the two separate amendments each had filed last week. The new bipartisan language would build upon the administration’s announcement last week that it was naming the CBI as a ‘primary money laundering concern’ under the Patriot Act and go further than President Barack Obama’s Nov. 19 executive order expanding sanctions on Iran’s petroleum sector. The Senate amendment would add to that by barring any U.S. financial institution from doing business with any foreign financial institution that knowingly conducted any significant financial transaction with the CBI. The Kirk-Menendez amendment got unanimous consent in the Senate on Monday for consideration on the defense bill, which is on the floor this week. It will get a vote, probably before Dec. 2, and is expected to pass overwhelmingly. The administration has resisted any congressional efforts to force the imposition of Iran sanctions ahead of its own schedule, but Obama will be hard pressed to veto the must-pass defense bill over the issue.” [The Cable, 11/29/11]

Continued instability in Iran worrying oil markets; military action would result in price spikes. Reuters reports: “‘Iran’s nuclear programme is motivated by regime survival,’ said international policy analyst Alireza Nader of RAND Corporation, a U.S.-based research group. ‘It appears the Islamic Republic has made the calculation that a potential nuclear weapons capability is worth the price of sanctions, as long as sanctions do not imperil the regime.’ If that is the case, the latest push by the United States and its European allies may do little to force a change of course by Iran in the long-running nuclear dispute, which has the potential to trigger a wider conflict in the Middle East.” Talk of military action or financial disruptions, combined with domestic instability, is putting upward pressure on oil prices – heightening strains on the fragile economic recovery. Reuters also reports that earlier talk of such action pushed up oil prices by more than a third: “This month’s speculation of an attack on Iran is the most intense since 2007, when reports showing that Iran had not halted uranium enrichment work fuelled speculation that President George W. Bush could launch some kind of action during his last year in office. Those fears helped fuel a 36 percent rise in oil prices in the second half of the year.” [Reuters, 11/29/11. Reuters, 11/30/11]

What We’re Reading

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CIA Director David Petraeus signals his opposition to terror detainee proposals currently before the Senate.

The Pakistani Army is treating the recent NATO air attack as a deliberate act of aggression , a position that could hurt future security operations in Afghanistan.

U.S. and Iraqi leaders signaled that the two governments are working toward an agreement to return some American forces to Iraq after completion of next month’s troop withdrawal to help train Iraqi units and maintain security gains.

Authorities said turnout likely exceeded 70 percent in the second day of parliamentary elections in Egypt, a point that the ruling military administration is using to discredit the renewed demonstrations in Tahrir Square.

The Turkish government imposed new economic and financial sanctions on Syria, following the Arab League’s sanctions, and intensifying calls for President Assad to step down.